The Australian government has made an announcement in their Federal Budget to amend the Income Tax Assessment Act, whereby deductions for bad debts will be denied between related parties that are not members of the same consolidated group where the bad debt written off will not be included as part of the debtor’s income.
It is proposed that in such situations the creditor will have a capital loss rather than a deduction for income tax purposes. This situation will arise where for example the creditor is resident in Australia and the debtor is resident in New Zealand. This has not yet been enacted, but once done it will be back dated to 8th of May 2012.
This will add further layer of complexity to the already complex rules. For example, there is already a tax adjustment when a debt is forgiven: the beneficiary of the forgiveness loses (in descending order) tax losses, capital losses, the tax cost of depreciating assets and the cost base of capital assets up to the extent of the amount forgiven. Related parties can currently choose to forego the losses and the tax consequences.
ATO’s COMPLIANCE PROGRAM
ATO’s annual compliance program was released in July 2012. It identifies areas of compliance risk where ATO’s focus will be directed. Namely:
- Taxation of Financial Arrangements (TOFA):
- Validity of elections made for the purposes of TOFA
- Correct application of tax timing methods
- Profit shifting between jurisdictions,
- Transfer pricing and thin capitalisation
- Entities with significant asset revaluations that may not be able to meet the safe harbour debt values without these revaluations
- Corporate restructuring
- Mergers and acquisitions
- Complex and unusual financial arrangements
- Pre-restructuring activities
- Changes to the effective ownership and control where the result may be deferral or avoidance of taxation
- Inclusion of foreign partnerships in consolidated groups aimed at achieving a deduction of interest in two jurisdictions
- Further Audit activity will be in areas of:
- Research & Development